Another welcome change to the tax laws is an extension of the opportunity for direct charitable rollovers from IRAs in certain circumstances through the end of 2009. The $700 billion Emergency Economic Stabilization Act of 2008 passed by Congress and signed into law by President Bush last October extended a popular tax break that allows individual taxpayers who are at least 70½ to exclude up to $100,000 annually of otherwise taxable IRA distributions that are paid directly to qualifying charitable organizations. The extension is effective for calendar years 2008 and 2009.
Tax Advantages of Exclusion
Before this special exclusion first became available in 2006, the use of IRA assets to make a lifetime gift to charity required that you withdraw funds from your IRA account as taxable income and then take a charitable income tax deduction for the gift. As a result of complexities arising from charitable deduction ceiling limitations and phase-outs for itemized deductions and personal exemptions, the result was seldom a complete wash. Treating the direct distribution of IRA funds to charity as a pure exclusion from income has many important tax advantages which make such charitable giving attractive.
- Gifts to charity from an IRA account are not subjected to the maximum ceiling and carry forward limitations that would otherwise apply. Thus, if you have already maximized the charitable income tax deduction for the year, you still can take full advantage of the exclusion for gifts made directly from an IRA over and above any charitable income tax deduction to which you may be otherwise entitled.
- Since the withdrawn amount is not included in federal taxable income, it does not (i) affect the phase-out of itemized deductions and the phase-out of the alternative minimum tax exemption, (ii) increase the floor thresholds for the deductibility of medical expenses and miscellaneous itemized deductions, or (iii) increase the level of taxability of social security income.
- Treatment as an exclusion means that if you do not itemize deductions for federal income tax purposes you still can enjoy the equivalent of a full charitable income tax deduction.
- Similarly, taxpayers in states such as Connecticut and Massachusetts that tax IRA distributions but do not allow the benefit of itemized deductions also receive the benefit of their contributions for state income tax purposes.
- The distribution to charity can be applied in satisfaction of your minimum required distribution for the year, thus reducing the level of taxable income that otherwise would be recognized. Additionally, the distribution will be characterized as a withdrawal distribution from the taxable portion of the IRA account if you made after-tax contributions in the past, thus preserving the availability of such after-tax contributions to minimize the taxability of future withdrawals.
Which Taxpayers Qualify?
The exclusion applies to individuals who have attained age 70½ by the date of contribution. The maximum amount that can be excluded is $100,000 per individual per year, which means that a married couple could donate up to $200,000, assuming each spouse has an IRA with at least $100,000 in before-tax contributions and earnings.
Which Charities Qualify?
In general, the gift must be made to a so-called public charity such as a church, hospital, school, museum, etc. Gifts to donor-advised funds, supporting organizations and most private foundations do not qualify. Taxpayers can make as many gifts in any amounts they choose as long as the $100,000 per taxpayer limitation is not exceeded within a single calendar year.
Which IRA Accounts Qualify?
Traditional and inherited IRA accounts, as well as Roth IRA accounts, qualify for the exclusion. Simple IRA accounts and SEP IRA accounts can qualify if the taxpayer did not make contributions to the IRA plan within the same qualified plan year as the year in which the charitable distribution takes place. Only distributions that otherwise would have been taxable distributions qualify.
How To Arrange For The Distribution
Forms should be available from your IRA custodian. It is important that the distribution be made by the IRA custodian directly to charity -- although the tax rules do permit the IRA custodian to provide you with a check made payable to the designated charity, which you can then deliver or mail to the designated charity with your own personal letter. A check made out to you that you subsequently endorse over to the recipient charity, however, will not qualify for the exclusion. Also, it is critical under the tax rules that the gift be acknowledged in writing by the charitable organization in order to qualify for the exclusion.